M/s Atotech India Ltd., Gurgaon V. ACIT, Gurgaon

ITA 3679/DEL/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6717 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 27-07-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 07-06-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMIT RAJ
• Keywords: Related party transaction; Transfer pricing; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary; Fair market value
• Section: 92D; 92B; 234B; 92

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE I.C.SUDHIR , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 3679 /DEL/ 2013 ( ASSESSMENT YEAR: 2005 - 06 ) & ITA NO. 1099 /DEL/ 2012 ( ASSESSMENT YEAR: 2006 - 07) ATOTECH INDIA LTD, 66, KM STONE, NH - 8, DELHI JAIPUR HIGHWAY, GURGAON PAN:AACCM0338G VS. ACIT, GURGAON CIRCLE, GURGAON (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. KANCHAN KAUSHAL, CA SH. RAVI SHARMA, ADV REVENUE BY: SH. AMIT RAJ, SR. DR DATE OF HEARING 27/07/ 2016 DATE OF PRONOUNCEMENT 25 / 10 /2016 O R D E R PER PRASHANT MAHARISHI, A. M. ITA NO 3679/ DEL/2013 A Y 2005 - 06 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A) - ROHTAK DATED 30.03.2013 FOR THE ASSESSMENT YEAR 2005 - 06. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL IN ITA NO 3679/DEL/2013 FOR THE ASSESSMENT YEAR 2005 - 06: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CCIT(A)') U/S 250 OF THE INCOME TAX ACT, 1961 ('THE ACT) IS BAD IN LAW . 2. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, WHILE CONFIRMING THE ADDITION OF RS. 58,923,746/ - MADE BY THE LD. AO / TPO THE LD. CIT (A) HAS GROSSLY ERRED: 2.1. IN MISINTERPRETING THE PROVISIONS OF SECTION 926 OF THE INCOME TAX ACT, 1961 AND DISREGARDING THE ESTABLISHED JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE TO SUBSTANTIATE THE SAME. 2.2. IN CONSIDERING FREE OF COST ('FOC') SUPPLY OF CHEMICALS TO A THIRD PARTY CUSTOMER VIZ. AT&S INDIA PRIVATE LIMITED, A DOMESTIC COMPANY, AS DEEMED RELATED PARTY TRANSACTION UNDER SECTION 926(2) OF THE ACT PAGE 2 OF 15 2.3. IN CONFIRMING THE ACTION OF THE LD. TPO OF MAKING AN ADJUSTMENT IN RESPECT OF A DOMESTIC TRANSACTION. 2.4. IN NOT APP RECIATING THE BUSINESS RATIONALE FOR MAKING FOC SUPPLY TO A KEY CUSTOMER, DISREGARDING THE BUSINESS/COMMERCIAL REALITY, BUSINESS STRATEGY, AND INDUSTRY PRACTICE RELEVANT TO THE APPELLANT. 2.5. IN IGNORING THE INDEPENDENT THIRD PARTY TRANSACTIONS SUBMITTED BY THE APPELLANT TO SUBSTANTIATE THE ALLEGED FOC SUPPLIES MADE BY THE APPELLANT. 2.6. IN NOT APPRECIATING THE FACT THAT THE ALLEGED FOC SUPPLIES HAVE ALREADY BEEN BENCHMARKED BY THE APPELLANT USING TNMM. 3. THAT ON THE FACTS AND IN CIRCUMSTANCES OF TH E CASE AND IN LAW, WHILE CONFIRMING THE ADDITION OF RS. 30,175,982/ - MADE BY THE LD. AO / TPO THE LD. CIT (A) HAS GROSSLY ERRED - 3.1 IN REJECTING THE COMPARABLE COMPANIES AS IDENTIFIED BY THE APPELLANT, BASED ON ERRONEOUS REASONS AND PRESUMPTIONS, AND ALSO CONTRADICTING BASIC TRANSFER PRICING PRINCIPLES 3.2 IN NOT APPROPRIATELY CONSIDERING THE FUNCTION, ASSET AND RISK PROFILE OF THE COMPANY USED FOR COMPARISON WITH THE APPELLANT. 3.3 IN CONFIRMING THE FRESH SEARCH CARRIED OUT BY THE LD. AO/TPO USING AN ERRONEOUS COMPARABLE SET OF ONLY ONE COMPANY AGAINST THE PRINCIPLE OF COMPARABILITY. 3.4 WITHOUT PREJUDICE TO GROUND 2, IN CONFIRMING THE ACTION OF THE LD. AO/TPO OF NOT ADDING FOC SUPPLY ADJUSTMENT OF RS. 5,89,23,746 TO THE OPERATING INCOME OF APPELLAN T WHILE DETERMINING OPERATING MARGIN, THEREBY RESULTING IN DOUBLE TAXATION. 3.5 IN MAKING TP ADJUSTMENT ON TOTAL TURNOVER INCLUDING SALES MADE TO NON AES AND NOT RESTRICTING THE AMOUNT OF ADJUSTMENT TO INTERNATIONAL TRANSACTIONS WITH AES. 4. THAT THE LD CIT(A) ERRED IN CONFIRMING LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE AND IN LAW, THE LD CIT(A) HAS ERRED IN CONFIRMING INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT MECHANICALLY AND WITHO UT RECORDING ANY ADEQUATE REASONS FOR SUCH INITIATION. 3. ASSESSEE , INCORPORATED IN MARCH 1996 TO MEET THE REQUIREMENTS FOR PLATING CHEMICALS, IS WHOLLY OWNED SUBSIDIARY OF COMPANY INCORPORATED IN THE NETHERLANDS THAT IS ATOTECH B V . EARLIER THE ASSESSEE WAS OPERATING IN INDIA, AS MAX ATTOECH LTD, A JOINT VENTURE COMPANY BETWEEN THE NETHERLAND COMPANY AND MAX INDIA LTD. IT IS INVOLVED IN THE BU SINESS OF MANUFACTURING AND MARKETING OF SPECIALTY CHEMICALS AND COMPOUNDS USED FOR GENERAL METAL FINISHING AND PRODUCTION OF PRINTED CIRCUIT BOARDS. 4. IT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION ON 31/10/2005 SHOWING LOSS OF R S. 26825833/ . AS ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS , THEREFORE, THE LD. ASSESSING OFFICE R REFERRED TO THE LD. TRANSFER PRICING OFFICER TO DETERMINE THE ARMS LENGTH PRICE IN PAGE 3 OF 15 RESPECT OF INTERNATIONAL TRANSACTIONS, WHICH WERE REPORTED I N FORM 3C EB F OR PURCHASE OF RAW METAL COMPONENTS, AGENCY COMMISSION RECEIVED, COST - SAVING EXPENSES PAID, HOST CHARGES PAID AND COST RECHARGES RECEIVED. THE ASSESSEE BENCHMARK THE TRANSACTION OF THE PURCHASE OF RAW MATERIALS, AGENCY COMMISSION RECEIVED, CO ST SHARING EXPENSES PAID AND COST RECHARGES PAID APPLYING THE TRANSACTIONAL NET MARGINAL METHOD AS THE MOST APPROPRIATE METHOD. FOR THE PURPOSE OF COST RECHARGES RECEIVED, IT APPLIED CUP METHOD AS MOST APPROPRIATE METHOD . FOR WORKING OUT ARMS LENGTH PRI CE OF ITS TRANSACTIONS WHERE TRANSACTIONAL NET MARGIN METHOD WAS APPLIED IT ADOPTED PROFIT LEVEL INDICATOR OF OPERATING PROFIT MARGIN WHICH IS OPERATING PROFIT/SALES. FOR THE PURPOSE OF COST RECHARGES RECEIVED BY THE ASSESSEE IT APPLIED CUP A S THE MOST AP PROPRIATE METHOD STATING REASONS THAT THE TRANSACTIONS ARE UNDERTAKEN ON A COST - TO - COST BASIS R EGARDING THE INTERNATIONAL TRANSACTIONS TO WHICH THE TRANSACTIONAL NET MARGIN METHOD WAS APPLIED. IT WORKED OUT ITS PLI OF OPERATING PROFIT MARGIN AT 4.61%. FOR COMPARABILITY ANALYSIS, IT SELECTED 15 COMPARABLES WHOSE ARITHMETIC MEAN OF OPERATING PROFIT MARGIN WAS DETERMINED AT 6.22%. THEREFORE, EXERCISING THE OPTION + - 5% RANGE ON THE ARMS LENGTH PRICE THE ASSESSEE CONTENDED THAT THE VALUE OF THE INTERNATIONAL TRANSACTION IS AT ARMS LENGTH. 5. ON FAR, TRANSFER PRICING STUDY REPORT PREPARED BY THE ASSESSEE SHOWS THAT IT IS A ROUTINE MANUFACTURER AND MARKETER OF SPECIALTY CHEMICALS AND COMPOUNDS USED FOR GENERAL METAL FINISHING AND PRODUCTION OF PRINTED CIRCUIT B OARDS. IT WAS ALSO STATED THAT IT CARRIES OUT ROUTINE FUNCTIONS AND ASSUMES NORMAL RISK ASSOCIATED WITH CARRYING OUT S UCH BUSINESSES. REGARDING ASSET EMPLOYED IT IS MENTIONED THAT ITS MANUFACTURING FACILITIES, DISTRIBUTING INFRASTRUCTURE, OFFICE PREMISES , WAREHOUSING FACILITIES AND COMPLICATION FACILITIES ARE USED FOR THE PURPOSE OF ITS BUSINESS AND IT POSSESSES ROUTINE INTANGIBLES SUCH AS GOODWILL AND NONCOMPETE FEES. IT DOES NOT CARRY ANY RESEARCH AND DEVELOPMENT ON ITS OWN. HOWEVER, IT CONTRIBUTES TO T HE R&D COST INCURRED BY THE GROUP. 6. ON REFERENCE TO THE LD. TRANSFER PRICING OFFICER. HE ACCEPTED THE METHOD CHOSEN BY THE ASSESSEE AND THE CHOICE OF THE PRO FIT LEVEL INDICATOR. ON A FRESH SEARCH CONDUCTED BY THE LD. TRANSFER PRICING OFFICER 3 COMPANIES WE RE SELECTED FROM THE DATABASE AS COMPARABLES OUT OF WHICH IT REJECTED THE 2 COMPANIES AND THEREFORE ONLY ONE COMPANY NAMELY GROVER AND WELL INDIA PAGE 4 OF 15 LTD REMAINED AS A COMPARABLE. THE LD. TRANSFER PRICING OFFICER COMPUTED THE PLI OF THAT COMPARABLE AT 10.77% A ND COMPARED IT WITH THE PLI OF THE ASSESSEE, WHICH IS 4.6% AND THEREFORE DETERMINED THE DIFFERENCE OF RS. 30175982 / - ON ACCOUNT OF ADJUSTMENT. HE DID NOT PROPOSE ANY ADJUSTMENT ON RECEIPT OF COST RECHARGES. 7. HE FURTHER ANALYZED THE NOTE NO. 8 OF SCHEDULE 16 OF THE ANNUAL ACCOUNT OF THE ASSESSEE WITH RESPECT TO FREE OF COST SUPPLY OF GOODS TO A KEY CUSTOMER IN INDIA AMOUNTING IN ALL TO RS. 58923746/ . ACCORDING TO THAT NOTE, IT IS MENTIONED THAT THE COMPANY HAS MADE SUPPLIES FREE OF COST TO A KEY CUSTOMER IN INDIA AS PART OF MEMORANDUM OF UNDERSTANDING SIGNED BY THE COMPANY WITH THE CUSTOMER DATED 28/10/2003 AND UNDER AN OVERALL ARRANGEMENT REACHED BY ITS OVERSEAS FELLOW SUBSIDIARY WITH THIS CUSTOMER. ON QUERY BY THE LD. TRANSFER PRICING OFFICER. , IT WAS SUBMITTED THAT THE SAID TRANSACTION IS NOT COVERED UNDER THE SCOPE OF INTERNATIONAL TRANSACTION AS THE GOODS ARE SUPPLIED BY THE ASSESSEE FREE OF COST TO A LOCAL ENTITY AND AS SUCH, BOTH THE PARTIES ARE RESIDENT ENTITIES AND THERE FORE THE PROVISIONS OF SECTION 92B CANNOT BE APPLIED AS THAT APPLIES ONLY ON A TRANSACTION BETWEEN A RESIDENT AND NON - RESIDENT. THIS CONTENTION WAS REJECTED BY THE LD. TRANSFER PRICING OFFICER STATING THAT IF THERE EXIST ANY TRANSACTION BETWEEN AN ENTERPRI SE AND ANY OTHER PERSON UNDER AN OVERALL ARRANGEMENT BETWEEN SUCH OTHER PERSON AND AN ASSOCIATED ENTERPRISE OF ONE OF THE TRANSACTING ENTITIES THEN THE TRANSACTION SHALL BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES. HE FURT HER HELD THAT DESPITE SEVERAL OPPORTUNITIES PROVIDED BY HIM THE ASSESSEE HAS NOT SUBMITTED THE DETAILS OF THE PRIOR ARRANGEMENT ENTERED INTO BY AT &S INDIA LIMITED AND OVERSEAS ASSOCIATED ENTERPRISE. HE FURTHER HELD THAT THOUGH THE SALES VALUE OF THE GOOD S WERE STATED TO BE RS. 58923746/ BUT THE COST PRICE OF THESE GOODS WAS ONLY RS. 17764239/ - BY THE ASSESSEE HOWEVER, NO CREDIBLE COSTING DETAILS HAVE BEEN FILED TO SUPPORT THE SAME. THEREFORE HE HELD THAT TRANSACTIONS RELATED TO THE SUPPLY OF GOODS FREE OF COST WHAT SALES VALUE OF RS. 58923746/ - IS A DEEMED INTERNATIONAL TRANSACTION AND THE ARMS LENGTH PRICE OF THIS TRANSACTION HAS TO BE DETERMINED. T HEREFORE HE PROPOSED AN ADJUSTMENT OF RS. 58923746 / - BEING THE ADJUSTMENT ON ACCOUNT OF THE DEEMED INTERN ATIONAL TRANSACTIONS OF THE GOODS WHICH THE ASSESSEE SHOULD HAVE REALISED FROM IS ASSOCIATED ENTERPRISE AGAINST THE BOOK VALUE OF THOSE PAGE 5 OF 15 TRANSACTION AT RUPEES NIL. THEREFORE HE PROPOSED A TOTAL AD JUSTMENT OF RS. 8 9099 728 TO INTERNATIONAL TRANSACTION OF THE ASSESSEE. 8. ON RECEIPT OF THE ORDER OF THE LD. TRANSFER PRICING OFFICER UNDER SECTION 92CA (3) DATED 09/09/2008 , THE LD. ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDER UNDER SECTION 143 ( 3 ) OF THE ACT ON 27. 12 2008 DETERMINING THE TOTAL INCOME OF RS. 62 2 73895/ AGAINST THE LOSS RETURN OF RS. 26825833 / - FILED BY THE ASSESSEE INCORPORATING THE ADJUSTMENT PROPOSED BY THE LD. TRANSFER PRICING OFFICER OF RS. 89099728./ - . 9. AGGRIEVED BY THE ORDER OF THE LD. ASSESSING OFFICER THE ASSESSEE PREFERRED AN APPE AL BEFORE THE LD. CIT (A), ROHTAK, WHO PASSED AN ORDER DATED 30/03/2013 WHEREIN HE HAS REJECTED ALL THE CONTENTIONS OF THE ASSESSEE AND DISMISS ED THE APPEAL. AGGRIEVED BY THE ORDER OF THE LD. CIT (A) THE ASSESSEE HAS PREFERRED APPEAL BEFORE US RAISING THE ABOVE GROUNDS OF APPEAL. 10. GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE IS GENERAL IN NATURE AND THEREFORE SAME IS DISMISSED. 11. GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE IS AGAINST THE ADDITION OF RS. 58923746 MADE BY THE LD. THAT TRANSFER PRICING OFFICER AND CONFIRMED BY THE LD. THAT CIT (A) ON ACCOUNT OF SUPPLY OF MATERIAL FREE OF COST TO A BUYER STATING IT TO BE AN INTERNATIONAL TRANSACTION. 12. THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED BEFORE US THAT IN THE FINANCIAL YEAR 2004 05 AS PART OF ITS MARKET PE NETRATION STRATEGY THE ASSESSEE PROVIDED CERTAIN FREE OF COST CHEMICALS FOR TESTING AND EVALUATION TO A KEY CUSTOMER IN INDIA WHICH INTERALIA IS ENGAGED IN MANUFACTURE OF PRINTED CIRCUIT BOARDS. THE MATERIAL WAS SUPPLIED FOR TESTING AND EVALUATION PURPOSES BETWEEN INDEPENDENT DOMESTIC PARTIES. HE FURTHER SUBMITTED THAT THE LD. TRANSFER PRICING OFFICER FAILED TO APPRECIATE THAT THE FREE OF COST SUPPLY OF CHEMICALS TO THAT PARTICULAR PARTY BY THE APPELLANT IS A DOMESTIC TRANSACTION BETWEEN 2 RESIDENT TAXPAYER AND THIS BEING A TRANSACTION WITH AN UNRELATED 3 RD PARTY IN INDIA AND BEING A DOMESTIC TRANSACTION DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION ENTERED INTO WITH ITS ASSOCIATED ENTERPRISE THEREBY BEING OUTSIDE THE PURVIEW OF THE PROVISIONS OF SECTION 92 OF THE INCOME TAX ACT AND THE JURISDICTION OF THE LD. TRANSFER PRICING OFFICER. HE FURTHER SUBMITTED THAT THE ENTIRE TRANSFER PRICING PROVISIONS AS CONTAINED IN CHAPTER X OF THE ACT WILL APPLY ONLY WHEN INCOME ARISES FROM AN INTERNATIONAL TRANSACTIONS, WHICH HAS TO BE BETWEEN THE 2 NONRESIDENTS, OR PAGE 6 OF 15 AT LEAST ONE OF THEM BEING NON - RESIDENT. THEREFORE HE SUBMITTED THAT THE TRANSFER PRICING PROVISIONS CAN ONLY APPLY WHEN THERE IS A TRANSACTION BETWEEN 2 OR MORE ASSOCIATED ENTERPRISE AND EITHER OR BOTH OF THE M IS A NON - RESIDENT. HE FURTHER SUBMITTED THAT FINANCE BILL 2014 HAS AMENDED THE PROVISIONS OF SECTION 92B RELATING TO THE MEANING OF THE INTERNATIONAL TRANSACTION AND THEREFORE THAT AMENDMENT PROVIDES THAT THE RELEVANT TRANSACTION SHALL BE DEEMED TO BE AN INTERNATIONAL TRANSACTION WHERE THE ENTERPRISE OR THE ASSOCIATED ENTERPRISE OR BOTH OF THEM ARE NON - RESIDENT IRRESPECTIVE OF WHETHER SUCH OTHER PERSON IS A NON - RESIDENT OR NOT. HE SUBMITTED THAT THE ABOVE AMENDMENT IS EFFECTIVE FROM 01/04/2015 AND WILL AP PLY ACCORDINGLY TO THE ASSESSMENT YEAR 2015 16, AND SUBSEQUENT YEARS. HE FURTHER RELIED ON THE DECISION OF HYDERABAD BENCH OF THE TRIBUNAL IN SWARNADHARA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PRIVATE LIMITED VERSUS DCIT WHEREIN IT HAS BEEN HELD T HAT THE PROVISIONS OF SECTION 92B(2) CANNOT BE APPLIED TO THE TRANSACTION BETWEEN 2 RESIDENT ENTITIES. HE FURTHER RELIED ON THE DECISION OF THE COORDINATE BENCH IN CASE OF KODAK INDIA PRIVATE LIMITED (ITA NO. 7349/MUM/2012) WHEREIN SIMILAR PROPOSITION WAS LAID DOWN. HE FURTHER REFERRED TO THE MEMORANDUM OF UNDERSTANDING DATED 28/10/2003 WITH AT & S PURSUANT TO ITS MARKETING PENETRATION STRATEGY WHEREIN THE ASSESSEE AGREED TO SUPPLY PLATING CHEMICALS TO THAT PARTICULAR PARTY ON A FREE OF COST BASIS FOR TESTING PURPOSES. HE FURTHER REFERRED TO THE VARIOUS PROVISIONS OF THE MEMORANDUM OF UNDERSTANDING AND STATED THAT EVEN THE AMENDED PROVISIONS OF SECTION 92B (2) OF THE ACT DO NOT APPLY IN ITS CASE BECAUSE THERE IS NO DIRECT AG REEMENT BETWEEN SUCH OTHER PERSON AND THE TERMS OF THE AGREEMENT BETWEEN THE BUYER AND ASSESSEE ARE DETERMINED BOTH IN SUBSTANCE AND FORM BY THE ASSESSEE. THEREFORE, THERE DOES NOT EXIST PRIOR ARRANGEMENT. THEREFORE, HE STATED THAT THE APPELLANT HAS INDEPE NDENTLY NEGOTIATED THE SALE PRICE AND OTHER TERMS OF THE TRANSACTION WITH THE PARTY AND THUS THE SAID TRANSACTION IS AN INDEPENDENT TRANSACTION BETWEEN TWO THIRD PARTIES WHERE THE TERMS OF THE TRANSACTIONS ARE DETERMINED BETWEEN THEM AND THEREFORE THE TRAN SACTION OF THE FREE OF COST SUPPLY OF MATERIAL TO THE AT&S WILL NOT CONSTITUTE A DEEMED INTERNATIONAL TRANSACTIONS FOR THE PURPOSES OF SECTION 92B (2). HE FURTHER REFERRED TO THE BUSINESS RATIONALE FOR SUPPLY OF FREE OF COST MATERIAL TO THAT PARTICULAR PAR TY AND STATED THAT BY SUPPLY OF THESE MATERIALS FREE OF COST, IT PAGE 7 OF 15 BECAME ONE OF THE LARGEST CUSTOMERS OF THE APPELLANT AND SUBSEQUENTLY BECOMING ITS SINGLE LARGEST CUSTOMER. AND, THEREFORE, HE SUBMITTED THAT THE APPELLANT RECOVERED THE ENTIRE COST INCURRED BY IT WITHIN A FEW MONTHS AND IN THE PROCESS SUCCESSFULLY ACQUIRED A PROFITABLE CUSTOMER FOR THE FUTURE. HE FURTHER SUBMITTED THAT THE EXPENSES INCURRED FOR THE FREE OF COST SUPPLY BY THE ASSESSEE ARE ESSENTIALLY IN THE NATURE OF THE PROMOTIONAL EXPENSES T HAT HAVE BEEN INCURRED BY THE APPELLANT TO EXPAND ITS MARKET SHARE IN THE SUBSEQUENT YEARS. HE FURTHER REFERRED TO THE PARA 1.59 AND 1.60 OF THE OECD GUIDELINES PROVIDING THAT BUSINESS STRATEGIES ALSO INCLUDE MARKET PENETRATION SCHEME AND THEREFORE SUCH CO MPANIES ACHIEVE LOWER PROFIT LEVELS AT THEN OTHER TAXPAYERS OPERATING IN THE SAME MARKET. TO SUBSTANTIATE THE ABOVE. HE STATED THAT IN SUBSEQUENT YEARS THE GROSS MARGIN OF THE ASSESSEE INCREASED SUBSTANTIALLY. THEREFORE HE SUBMITTED THAT THE LD. TRANSFER P RICING OFFICER HAS REACHED AN ERRONEOUS UNDERSTANDING OF THE FACT AND THEREFORE THE ADDITION MADE BY THE LD. TRANSFER PRICING OFFICER IS IN CONTRAVENTION OF THE PROVISIONS OF RULE 10 B AND THEREFORE OUGHT TO BE DELETED. 13. IN RESPONSE TO THIS, THE LD. DEPART MENTAL REPRESENTATIVE SUBMITTED THAT THERE IS AN OVERALL ARRANGEMENT OF THE ASSOCIATED ENTERPRISE WITH THE CUSTOMER IN INDIA. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS SIGNED MEMORANDUM OF UNDERSTANDING WITH THE SAME CUSTOMERS IN INDIA. SUCH AN OVERALL ARRANGEMENT AND THE SUBSEQUENT MEMORANDUM OF UNDERSTANDING BY THE ASSESSEE TO SUPPLY GOODS FREE OF COST TO THIS CUSTOMER IN INDIA AND, THEREFORE IT IS PERTINENT TO MENTION THAT DESPITE REPEATED REQUEST BY THE LD. TRANSFER PRICING OFFICER THAT ASSESSEE HAS NOT PRODUCED THE AGREEMENT WITH OVERSEAS ASSOCIATED ENTERPRISE. HE THEN SUBMITTED THAT SINCE THE SCHEME OF THE ARRANGEMENT SQUARELY FITS INTO THE DEEMING FICTION PROVISIONS OF SECTION 9 2B (2) THE SAID TRANSACTION OF FREE SUPPLY OF GOODS FALSE UNDER THE SCO PE OF INTERNATIONAL TRANSACTIONS. HE VEHEMENTLY RELIED UPON THE PARA NO. 17.1 OF THE ORDER OF LD. CIT (A). HE FURTHER SUBMITTED THAT AS THE MEMORANDUM OF UNDERSTANDING IS NOT ON RECORD WITH THE ASSESSING OFFICER AND THEREFORE THE MATTER SHOULD BE SET ASID E TO THE FILE OF THE LD. ASSESSING OFFICER OR LD. TRANSFER PRICING OFFICER. PAGE 8 OF 15 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. ACCORDING TO THE PROVISIONS OF SECTION 9 2B OF THE INCOME TAX ACT, THE DEFINITION OF THE INTERNATIONAL TRANSACTION IS AS UNDER: - 92B MEANING OF INTERNATIONAL TRANSACTION. (1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, INTERNATI ONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON - RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB - SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPR ISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE ; OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTE RPRISE. 15. ON READING OF THE ABOVE SECTION AS IT THEN EXISTED IN STATUTE, ACCORDING TO SUB SECTION (1) IT IS APPARENT THAT FOR THE PURPOSE OF THE PROVISIONS OF APPLICABILITY OF CHAPTER X THE INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISE WHERE EITHER OR BOTH OF THEM ARE NONRESIDENTS. 16. ACCORDING TO THE PROVISIONS OF SUBSECTION (2) TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH THIRD - PARTY SHALL BE DEEMED TO BE A INTERNATIONAL TRANSACTION ENTERED INTO BETWEEN 2 ASSOCIA TED ENTERPRISE PROVIDED THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN THE 3 RD PARTY AND THE ASSOCIATED ENTERPRISE OR THE TERMS OF THE TRANSACTIONS ARE DETERMINED IN SUBSTANCE BETWEEN THIRD - PARTY AND THE ASSOCIATED ENTERPRIS E. 17. AS THE AGREEMENT BETWEEN THE ASSESSEE AND THE 3 RD PARTY WHO IS A RESIDENT INDIAN FOR SUPPLY OF FREE OF COST MATERIAL AND THEREFORE NONE OF THE PARTIES TO THE TRANSACTION ARE NON - RESIDENT IT IS AMPLY CLEAR THAT THE PROVISIONS OF SUBSECTION 1 OF SECTION 9 2B DOES NOT APPLY. WITH RESPECT TO THE PROVISIONS OF SUBSECTION (2) , IT NEEDS TO BE SEEN WHETHER THE ABO VE TRANSACTION FALLS INTO THE DEFINITION OF THE DEEMED INTERNATIONAL TRANSACTIONS. FOR THIS PURPOSE, IT PAGE 9 OF 15 IS REQUIRED TO BE EXAMINED, WHETHER THERE EXIS TED A PRIOR AGREEMENT IN RELATION TO THAT PARTICULAR TRANSACTION BETWEEN THE 3 RD PARTY AND THE ASSOCIATED ENTERPRISE OR THE TERMS OF THE TRANSACTIONS ARE DETERMINED IN SUBSTANCE BETWEEN 3 RD PARTY AND THE ASSOCIATED ENTERPRISE. IT IS INTERESTING TO NOTE THA T IN THE FINANCIALS OF THE ASSESSEE NOTE NO. 8 OF SCHEDULE 16 CONTAINED REFERENCE TO THE ABO VE TRANSACTION. ACCORDING TO THAT IT IS MENTIONED THAT THE COMPANY HAS MADE SUPPLIES FREE OF COST WITH THE SALES VALUE OF RS. 5892 3746/ TO AT & S A CUSTOMER IN INDIA AS A PART OF MEMORANDUM OF UNDERSTANDING SIGNED BY THE COMPANY WITH CUSTOMER DATED 28/10/2003 AND UNDER AN OVERALL ARRANGEMENT REACHED BY ITS OVERSEAS FELLOW SUBSIDIARY WITH THIS CUSTOMER . ON THE READING OF THE ABOVE NOTE , THE LD. TRANSFER PRICING OFFICER HAS HELD THAT THERE IS AN OVERALL ARRANGEMENT OF THE ASSOCIATED ENTERPRISE WITH THE CUSTOMER IN INDIA. THEREFORE, THE LD. TRANSFER PRICING OFFICER RAISED THE QUERRY ABOUT THE OVERALL ARRANGEMENT WITH THE OVERSEAS ASSOCIATED ENTERPRISE HAD WITH TH IS CUSTOMER AND UNDER WHICH THE ASSESSEE WAS OBLIGED TO SUPPLY THE GOODS FREE OF COST. THE 2 ND ISSUE RAISED WAS WHETHER REGARDING THE ARRANGEMENT THAT THE ASSESSEE HAS WITH THE ASSOCIATED ENTERPRISE IN RESPECT OF SUPPLY OF GOODS TO THIS CUSTOMER AND THE MEMORANDUM OF UNDERSTANDING THAT THE ASSESSEE HAD WITH THE CUSTOMER. THE LD. TRANSFER PRICING OFFICER AT PAGE NO. 17, HAS HELD THAT THAT THE ASSESSEE HAS NOT DESPITE SEVERAL OPPORTUNITIES PROVIDED/ SUBMITTED THE DETAILS OF THE PRIOR ARRANGEMENT ENT ERED INTO BY AT & S INDIA LIMITED AND THE OVERSEAS ASSOCIATED ENTERPRISES, THOUGH THE ASSESSEE DENIED THE EXISTENCE OF ANY SUBSTANTIVE ARRANGEMENT AT ALL, WHICH WERE CONTRARY TO THE NOTES ON ACCOUNTS OF THE ASSESSEE. FURTHER, MOU RELIED UPON BY THE ASSESS EE BETWEEN ANOTHER SUBSIDIARY DATED 24/10/2005 WAS NOT A PRIOR OVERALL ARRANGEMENT UNDER WHICH THE GOODS HAVE BEEN SUPPLIED FREE OF COST TO THE CUSTOMER. IN VIEW OF THE ABOVE FACTS, THE ASSESSING NEEDS TO EXPLAIN THE NOTES ON ACCOUNTS WITH RESPECT TO THE C REDIBLE EVIDENCE THAT THERE DOES NOT EXIST ANY PRIOR ARRANGEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN THE UNRELATED PARTY AND THE ASSOCIATED ENTERPRISE. AS IT IS THE REQUEST OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT MEMORANDUM OF UNDERSTANDING IS NOT ON RECORD WITH THE LD. TRANSFER PRICING OFFICER THE MATTER MAY BE SET ASIDE TO THE FILE OF THE LD. TRANSFER PRICING OFFICER FOR VERIFICATION OF THE ISSUE OF THE SUPPLY OF MATERIAL FREE OF PAGE 10 OF 15 COST TO A RESIDENT PARTY. FURTHER, THE ASSESSEE HAS ALSO NOT PROVED THE ACTUAL COST OF THE FREE OF COST GOODS SUPPLIED BY THE ASSESSEE, WHICH IS STATED TO BE FAR LESS THAN THE SALES PRICE DETERMINED. FURTHER IN FREE OF COST SUPPLIES WHETHER THE ACTUAL COST OF GOODS OR THE FAIR MARKET VALUE OF THE GOODS SHOULD BE TAKEN AS ALP IS ALSO NOT DECIDED. IN VIEW OF THIS WE DO NOT HAVE ANY HESITATION IN SETTING ASIDE THE GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE TO THE FILE OF THE LD. TRANSFER PRICING OFFICER TO DECIDE WHETHER THE SUPPLY OF MATERIAL FREE OF COST TO A DOME STIC PARTY FALLS WITHIN THE DEFINITION OF INTERNATIONAL TRANSACTIONS UNDER SECTION 92B OF THE INCOME TAX ACT OR NOT , IF YES, AT WHAT VALUE AT THE COST OF GOODS SUPPLIED OR THE SALES VALUE, AFTER GRANTING NECESSARY AND ADEQUATE OPPORTUNITY TO THE ASSESSE E OF HEARING. IN THE RESULT GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE IS SET ASIDE TO THE FILE OF THE LD. TRANSFER PRICING OFFICER. 18. GROUND NO. 3 OF THE APPEAL OF THE ASSESSEE IS AGAINST THE CONFIRMATION OF THE ADDITION OF RS. 30175982/ - MADE BY THE LD. T RANSFER PRICING OFFICER AND CONFIRMED BY THE LD. CIT (A). 19. THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT THE LD. TRANSFER PRICING OFFICER HAS REJECTED ALL THE COMPANIES SELECTED BY THE APPELLANT WHICH ARE OF HAVING SIMILAR BUSINESS PROFILE WITHOUT PROVID ING ANY COGENT REASON. IT IS FURTHER STATED THAT ONLY ONE COMPARABLE SELECTED BY THE LD. TRANSFER PRICING OFFICER WAS OF 5 DECADE - OLD COMPANY AND WHICH IS CONTROLLING THE 45 - 50% MARKET SHARE OF THE INDIAN ELECTROPLATING MARKET. IT IS FURTHER CONTENDED THAT THE BOTH THE COMPANIES ARE IN DIFFERENT STAGE IN THEIR BUSINESS CYCLE AND THE BUSINESS MARKET STRATEGY FOR BOTH THE COMPANIES AND THEREFORE, ARE NOT COMPARABLE. HE REFERRED TO THE YEAR OF INCORPORATION OF THE COMPARABLE WHICH IS 1957 AND THE YEAR OF INCORPORATION OF THE ASSESSEE WHICH IS 1996 HAVING LESS THAN MARK 10% MARKET SHARE COMPARED WITH THE COMPARABLES 50% MARKET SHARE IN THE INDUSTRY. HE FURTHER SUBMITTED THAT THE TRANSFER - PRICING OFFICER HAS EXERCISED THE COMPARABILITY WITH ONLY ONE COMPA RABLE WHICH IS NOT SUFFICIENT AND ADEQUATE DATA FOR MAKING ANY ADJUSTMENT. HE FURTHER SUBMITTED THAT THE COMPARABLE HAS A RELATED PARTY TRANSACTIONS AND THEREFORE IT CANNOT BE TAKEN AS A COMPARABLE. HE FURTHER SUBMITTED THAT IN SUBSEQUENT YEARS THE COMPARA BLES SELECTED BY THE ASSESSEE WERE ALSO ACCEPTED BY THE LD. TRANSFER PRICING OFFICER. HE SUBMITTED A CHART WITH RESPECT TO THE 15 COMPARABLE SELECTED BY THE PAGE 11 OF 15 ASSESSEE, WHICH WERE ALSO TAKEN BY THE ASSESSEE IN ITS TP STUDY REPORT FOR SUBSEQUENT YEARS. IN THE END, HE SUBMITTED THAT THAT TRANSFER PRICING ADJUSTMENT SHOULD BE MADE ONLY IN PROPORTION OF INTERNATIONAL TRANSACTIONS OF THE APPELLANT EXCLUDING DOMESTIC AND NON - AES TRANSACTIONS. HE REFERRED TO THE SEVERAL DECISIONS OF THE COORDINATE BENCHES FOR THE A BOVE PROPOSITION. 20. AGAINST THIS, THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SINGLE COMPARABLE HAS BEEN ARRIVED AT BY THE LD. TRANSFER PRICING OFFICER AFTER MAKING THOROUGH SEARCH AND APPLYING THE VALID FILTERS. HE FURTHER SUBMITTED THAT THE COMP ARABLES WHICH ARE BEEN REJECTED. WITH RESPECT TO THE UNRELIABLE DATA AND THEREFORE THERE CAN BE NO FAULT WITH THE ORDER OF THE LD. TRANSFER PRICING IN REJECTING THOSE COMPARABLES. HE FURTHER REFERRED TO PARA NO. 13.1 OF THE ORDER OF THE 1 ST APPELLATE AUTHORITY, WHICH IS THAT THE COMPARABLE COMPANY HAS ONLY 10.37% OF THE TOTAL REVENUE WITH RELATED PARTY AND GENERALLY THE FILTER APPLIED IS OF 25% AND THEREFORE THIS ARGUMENT CANNOT BE ACCEPTED. HE FURTHER SUBMITTED THAT SELECTION REJECTION OF T HE COMPARABLE IN DIFFERENT ASSESSMENT YEAR CANNOT BE A GROUND FOR ACCEPTING OF SELECTING THE COMPARABLE IN THIS YEAR . FURTHER THE COMPARABLE REJECTED BY THE LD. TRANSFER PRICING OFFICER HAS DIFFERENT YEARS. THEREFORE, HE VEHEMENTLY SUPPORTED THE ACCEPT REJ ECT MATRIX ADOPTED BY THE LD. TRANSFER PRICING OFFICER. 21. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. ACCORDING TO THE TRANSFER PRICING STUDY REPORT OF THE ASSESSEE IT SELECTED 15 COMPARABLES AND WHOSE AM IS 6.22%, WHEREAS THE LD. TRANSFER PRICING OFFICER HAS ALSO CARRIED OUT INDEPENDENT SEARCH WHEREIN THE SAME DATABASE HAS THROWN ONLY THREE COMPANIES HAVING SIMILAR BUSINESS ALONG WITH THE ASSESSEE . THE DIFFERENCES ARISE IN DUE TO THE DIFFERENT BUSINESS SEGMENT ADOPTED BY THE ASSESSEE WHICH IS DIES , PIGMENTS, BORAX, SORBITOL ETC. WHEREAS THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PCB CHEMICALS AND GENERAL METAL FINISHING CHEMICALS. ON QUERRY BY THE LD. TRANSFER PRICING OFFICER ON THIS ASPECT, IT WAS SUBMITTED BY THE ASSESSEE THAT THAT THE SEARCH FOR COMPARABLE INDEPENDENT MANUFACTURERS OF PCB AND GMF CHEMICALS OR ELECTROPLATING CHEMICALS DID NOT YIELD ANY RESULT , THEREFORE BROADER SEARCH FOR COMPANIES MANUFACTURING SPECIALTY CHEMICAL WAS MADE TO ESTABLISH THE ARMS LENGTH NATURE OF THE OPERATING MARGIN EARNED BY THE ASSESSEE. IT IS FURTHER STATED BY THE ASSESSEE THAT ON QUERY BY THE LD. TRANSFER PRICING OFFICER, IT HAS PAGE 12 OF 15 CONDUCTED A FRESH SEARCH AGAIN ON PCB, GMF AND ELECTROPLATING CHEMICALS AND THE SEARCH IN THAT DATABASE HAS STILL NOT THROWN UP AN Y UNCONTROLLED COMPAN IES ENGAGED IN SIMILAR BUSINESS, HOWEVER NO SUCH DETAILS ARE AVAILABLE ON RECORD A BOUT THE FILTERS APPLIED BY THE ASSESSE AND OTHER CRITERIAS . IN RESPONSE TO THIS, IT HAS BEEN STATED BY THE LD. TRANSFER PRICING OFFICER THAT THE FINA NCIAL YEAR, OR YEARS FOR WHICH THE DATA HAS BEEN ANALYZED BY THE ASSESSEE IS NOT KNOWN FROM THE TRANSFER PRICING REPORT. COMPARED TO THIS, THE SEARCH CONDUCTED BY THE LD. TRANSFER PRICING OFFICER HAS THROWN THREE COMPARABLES OUT OF WHICH TOW COMPARABLES HAVE BEEN REJECTED BY THE LD. TRANSFER PRICING OFFICER ON ACCOUNT OF LOWER TURNOVER AND ABSENCE OF DATA BECAUSE OF THIS ONLY ONE COMPARABLE WAS LEFT ALONG WITH THE ASSESSEE COMPANY. THUS, IN THE ULTIMATE ANALYSIS, THE LD. TRANSFER PRICING OFFICER COMPARED THE PLI OF THE ASSESSEE WITH ONLY ONE COMPARABLE. FURTHERMORE IT WAS THE CONTENTION OF THE ASSESSEE THAT SOME OF THE COMPARABLES WHICH ARE ACCEPTED BY TPO IN SUBSEQUENT YEARS BUT REJECTED IN THIS YEAR , WHEN THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANC ES OF THE FAR OF THE ASSESSEE. WE FULLY AGREE WITH THE CONTENTION OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT IT CANNOT BE THE CASE THAT IF IN SUBSEQUENT YEARS THE SAME COMPARABLES ARE TAKEN BY THE ASSESSEES WHICH ARE NOT DISPUTED BY THE LD. TRANSFER PRIC ING OFFICER CANNOT BE THE SOLE BASIS FOR ACCEPTING THE SAME AS COMPARABLE IN THE CURRENT YEAR COMPARABILITY ANALYSIS. HOWEVER, IF THOSE COMPARABLES ARE NOT REJECTABLE BECAUSE OF ANY REASONABLE FILTER THERE HAS TO BE A VALID REASON FOR THEIR EXCLUSION IN RE SPECTIVE YEARS. FURTHERMORE THE COMPARABILITY ANALYSIS SHOULD ALSO BE BASED ON SUFFICIENT DATABASE TO ARRIVE AT REASONABLE RESULT. THEREFORE, IN THE INTEREST OF THE JUSTICE WE SET ASIDE GROUND NO. 3 OF THE APPEAL OF THE ASSESSEE BACK TO THE FILE OF THE LD. TRANSFER PRICING OFFICER TO CARRY OUT FRESH SEARCH AND ALSO EXAMINE THE FRESH SEARCH TO BE CARRIED OUT BY THE ASSESSEE FOR SUFFICIENT COMPARABLE. IT IS ALSO FURTHER DIRECTED THAT THE COMPARABLES SELECTED BY THE ASSESSEE WHICH ARE ACCEPTED BY THE LD. TRANS FER PRICING OFFICER IN SUBSEQUENT YEARS MAY ALSO BE CONSIDERED IF THEY ARE OTHERWISE NOT REJECTABLE. FURTHERMORE , THE LD. TRANSFER PRICING OFFICER MAY ALSO CONSIDER THE ARGUMENT OF THE ASSESSEE, A FRESH THAT WHETHER THE TRANSFER PRICING ADJUSTMENT ARE REQU IRED TO BE MADE ONLY IN PROPORTION OF INTERNATIONAL TRANSACTIONS OF THE APPELLANT EXCLUDING DOMESTIC AND NON - AE PAGE 13 OF 15 TRANSACTIONS. IN THE RESULT GROUND NO. 3 OF THE APPEAL OF THE ASSESSEE IS SET ASIDE TO THE FILE OF THE LD. TRANSFER PRICING OFFICER WITH ABOUT D IRECTION. 22. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO 1099/DEL/2012 AY 2006 - 07 23. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL IN ITA NO 1099/DEL/2012 FOR THE ASSESSMENT YEAR 200 6 - 07 : - 1. THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN ENHANCING THE INCOME OF THE APPELLANT BY RS.1,57,30,000/ - BY HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTIONS DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE AS ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROSSLY ERRED IN : 1.1. IN MISINTERPRETING THE PROVISIONS OF SECTION 92 B OF THE INCOME TAX ACT 1961 ('THE ACT'). 1.2. IN CONSIDERING FREE OF COST SUPPLY OF CHEMICALS TO A THIRD PARTY CUSTOMER VIZ. AT&S INDIA LIMITED ('AT&S'), A DOMESTIC COMPANY, AS DEEMED RELATED PARTY I NTERNATIONAL TRANSACTION UNDER SECTION 926(2) OF THE ACT. 1.3. IN GOING BEYOND HIS JURISDICTION AND MAKING AN ADJUSTMENT IN RESPECT OF A DOMESTIC TRANSACTION. 1.4. IN NOT APPRECIATING THE BUSINESS RATIONALE FOR MAKING FREE OF COST SUPPLY TO A KEY CUSTOME R AT&S AND DISREGARDING THE BUSINESS / COMMERCIAL REALITY, BUSINESS STRATEGY AND THE INDUSTRY PRACTICE RELEVANT TO THE ASSESSEE. 1.5. IN IGNORING THE FUTURE BENEFITS ACCRUING TO THE ASSESSEE FROM THE FREE OF COST SUPPLY WHILE EVALUATING THE ARM'S LENGTH N ATURE OF SUCH TRANSACTION. 1.6. IN IGNORING THE INDEPENDENT THIRD PARTY TRANSACTIONS SUBMITTED BY THE ASSESSEE TO SUBSTANTIATE THE ALLEGED FREE OF COST SUPPLIES MADE BY THE ASSESSEE. 1.7. IN NOT APPRECIATING THE FACT THAT THE ALLEGED FREE OF COST SUPPLIE S HAVE ALREADY BEEN BENCHMARKED BY THE ASSESSEE USING TRANSACTIONAL NET MARGIN METHOD ('TNMM'). 1.8. IN CONFIRMING THE ORDER PASSED BY THE LD. TPO UNDER SECTION 92CA OF THE ACT, BASED ON CONJECTURES, SURMISES, INFERENCES AND PRESUMPTIONS WHICH ARE NOT IN ACCORDANCE WITH FACTS OF THE CASE AND AGAINST LEGAL PRINCIPLES. 1.9. THAT THE LD. AO ERRED IN LEVYING OF INTEREST UNDER SECTION 234 'A', 'B', ''C', 'D' OF THE ACT. 1.10 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN I NITIATING THE PENALTY PROCEEDINGS UNDER SECTION 271(I)(C) OF THE ACT. 24. FOR THIS YEAR THE ASSESSEE FILED ITS RETURN OF INCOME ON 28/11/2006 DECLARING AN INCOME OF RS. 7 796 8133/ . AS THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS. THE MATTER WAS REFERRED BY THE LD. ASSESSING PAGE 14 OF 15 OFFICER TO THE LD. TRANSFER PRICING OFFICER FOR THE DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE LD. TRANSFER PRICING OFFICER WIDE ITS ORDER DATED 24/09/2009 UNDER SECTION 92CA (3) FOR THE ASS ESSMENT YEAR ACCEPTED THE TP STUDY DOCUMENT PREPARED BY THE ASSESSEE AND HELD THAT THE TRANSACTIONS WITH RESPECT TO THE PURCHASE OF RAW MATERIAL COMPONENTS, AGENCY COMMISSION RECEIPT, SALE OF PRODUCTS, PURCHASE OF CAPITAL GOODS, COST SHARING EXPENSES PAID, COSTLY CHARGES PAID DETERMINED BY ADOPTING THE TRANSACTIONAL NET MARGINAL METHOD AS THE MOST APPROPRIATE METHOD AND ADOPTING THE PLI OF 11.35% OF OPERATING PROFIT/SALES WAS ACCEPTED BY THE LD. TRANSFER PRICING OFFICER. HOWEVER, DURING THE YEAR THE ASSESSE E HAS SUPPLIED FREE OF COST GOODS HAVING SALES VALUE OF RS. 1 573 0000/ - TO A 3 RD PARTY IT WAS HELD TO BE AND DEEMED INTERNATIONAL TRANSACTION BY THE LD. TRANSFER PRICING OFFICER AND THEREFORE HE PROPOSED AN ADJUSTMENT TO THIS EXTENT TO THE TOTAL INCOME OF THE ASSESSEE ON THE SIMILAR FACTS AND CIRCUMSTANCES FOR ASSESSMENT YEAR 2005. 2006. THE LD. ASSESSING OFFICER PASSED DRAFT ASSESSMENT ORDER UNDER SECTION 14 FOR C 30 08/12/2009 INCORPORATING THE ABOVE ADJUSTMENT PROPOSED BY THE LD. TRANSFER PRICING OFFICE R AND ASSESSED THE TOTAL INCOME OF THE ASSESSEE AT RS. 9 369 8133/ AGAINST THE RETURNED INCOME OF THE ASSESSEE OF RS. 7 796 8133/ MAKING AN ADJUSTMENT OF RS. 1 573 0000/ TO THE TOTAL INCOME OF THE ASSESSEE. AGAINST THIS DRAFT ASSESSMENT ORDER. THE ASSE SSEE PREFERRED OBJECTIONS BEFORE THE LD. THAT DISPUTE RESOLUTION PANEL WHO GAVE A DIRECTION UNDER SECTION 144C (5) ON 28/12/2011 REJECTING THE CONTENTION OF THE ASSESSEE. THEREAFTER ON 27. 12 2011. THE LD. ASSESSING OFFICER PASSED AN ASSESSMENT ORDER UNDER SECTION 143 (3) DETERMINING THE TOTAL INCOME OF THE ASSESSEE IS AT RS. 9 369 8133/ WHERE THE ADDITION PROPOSED BY THE LD. TRANSFER PRICING OFFICER OF RS. 1.57 CRORES WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. AGAINST THIS ORDER. THE ASSESSEE HAS PREF ERRED AN APPEAL BEFORE US. 25. THE SOLITARY GROUND OF THE APPEAL IS OF THE ASSESSEE IS WITH RESPECT TO THE TRANSFER PRICING ADJUSTMENT WITH RESPECT TO THE FREE SUPPLY OF CHEMICALS TO A 3 RD PARTY CUSTOMER WHICH IS HELD TO BE DEEMED INTERNATIONAL TRANSACTION BY THE LD. TRANSFER PRICING OFFICER AND THEREBY MAKING THE ABOVE ADJUSTMENT. THE PARTIES SUBMITTED BEFORE US THAT THE ISSUE INVOLVED IN THIS APPEAL IS SIMILAR TO THE ISSUE IN THE APPEAL O F THE ASSESSEE FOR ASSESSMENT YEAR 2005 PAGE 15 OF 15 06 VIDE GROUND NO. 2 OF THAT APPEAL. IT WAS FURTHER STATED THAT ON FACTS AND CIRCUMSTANCES OF THE CASE IN BOTH THE YEARS ARE SIMILAR. 26. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AND ALSO PERUSED THE RELEVANT ORDERS OF THE LD. TRANSFER PRICING OFFICER AND THE DIRECTIONS OF THE LD. DISPUTE RESOLUTION PANEL. WE HAVE ALREADY DECIDED THE GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2005 06 WHEREIN WE HAVE SET ASIDE TO THE FILE OF THE LD. TRANSFE R PRICING OFFICER THE ISSUE OF ASCERTAINING WHETHER SUPPLY OF FREE OF COST MATERIAL BY THE ASSESSEE TO A 3 RD PARTY IS AN INTERNATIONAL TRANSACTION UNDER THE PROVISIONS OF SECTION 92B OF THE INCOME TAX ACT OR NOT. THEREFORE WE ALSO SET ASIDE GROUND NO. 1 OF THIS APPEAL ALONG WITH OTHERS SUB GROUNDS TO THE FILE OF THE LD. ASSESSING OFFICER TO DETERMINE WHETHER THE ALLEGED FREE OF COST SUPPLIES MADE BY THE ASSESSEE TO A DOMESTIC PARTY FALSE WITHIN THE DEFINITION OF THE INTERNATIONAL TRANSACTION OR NOT. IN THE RESULT GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE WITH RESPECT TO THE ABOVE ISSUE IS ALLOWED WITH ABOVE DIRECTION. ALL OTHER GROUNDS WITH RESPECT TO THE DETERMINATION OF ARMS LENGTH PRICE OF SUCH TRANSACTION ARE CONSEQUENTIAL THEREFORE THEY ARE NOT ADJUD ICATED AND DISMISSED. 27. IN THE RESULT APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2006 2007 IN ITA NO. 1099/DEL/2012 IS PARTLY ALLOWED WITH ABOVE DIRECTION. ORDER PRONOUNCED IN THE OPEN COURT ON 2 5 / 10 /2016. - S D / - - S D / - ( I.C.SUDHIR ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 2 5 / 10 /2016 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI